Draw the graph · Macro · Money market
The reserve requirement is raised
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Money demand stays put. Money supply shifts left.
A higher reserve requirement forces banks to hold more of each deposit idle and lend less. Fewer loans mean fewer deposits, so the quantity of money falls at every interest rate. The money supply line shifts left. Money demand is unchanged.
The nominal interest rate rises.
Common mistake. A common error is to shift money demand right because 'banks need more money.' Banks are holding reserves, not demanding money in the sense of the diagram. The money stock shrank, which is supply.
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Lesson: Central Bank Tools